Journal of Monetary Economics 4 (1978) 519-541. © North-Holland Publishing Company THE IMPACT OF MONETARY AND FISCAL POLICIES ON THE FRENCH FINANCIAL SYSTEM Andre FOURCANS* Ecole Superieure des Sciences Economiques et Commerciales (ESSEC), 95001 Cergy, France This paper presents a model of the French financial system and analyses the influence of policy instruments on one price (the interest rate) and two quantities (the stocks of bank credit and money). The development of hypotheses as to the behavior of the banking system and the public leads to a theoretical construct of the monetary system. After a comparative static analysis, the model is tested and the influence of policy instruments on the above mentioned three variables is empirically ascertained. Among other things, it is shown that the required reserve system is not optimally established and that some institutional reforms would improve the authorities' control over monetary processes. 1. Introduction Monetary processes have attracted much theoretical and empirical interest with the spread of the 'monetarist counter revolution.' Systematic generalizations about the role of money in a developed economy require the development of analytical constructs applicable to different institutional frameworks. This research proposes a step in this direction by presenting, and testing, a model of French monetary processes. Due to the crucial importance of interest rates, bank credit and money the analysis emphasizes the impact of fiscal and monetary instruments on these variables. Part 2 of this paper sets forth the theoretical aspects of a model incorporating the French institutional fl'amework. It analyses the monetary behavior of the banking system and the public. This development leads to the presentation of a theoretical construct of the monetary s)ste~n. The empirical analysis is pursued in part 3 v, here the model is tested econometrically both v, ith ordinary and two stage least squares. The empirical results permit the establishment of numerical values as to the elasticities of the interest rate, bank credit and money v, ith respect to policy variables. Finally, part 4 develops some propositions for reforms of the monetary system. *The author is grateful to Michele Fratianni for comments on an earlier draft and especially to Allan Meltzer tbr numerous suggestions that have significantly improved this paper. Any remaining problems are, of course, the sole responsibility of the author. This paper xvas revised while the author x~as visiting at Carnegie-Mellon University.